Regulation Best Interest (Reg BI) is the Securities and Exchange Commission’s (SEC) most recent regulation adopted to protect investors. Here is what it means for financial services professionals.
Through Regulation Best Interest (Reg BI) broker-dealers are held to a stronger standard of conduct; are required to provide a client relationship summary called Form CRS (investment advisers are also required to provide this client relationship summary under Reg BI); and are restricted on their use of the term adviser or advisor unless they are also actually registered as investment advisers.
Reg BI requires broker-dealers to disclose to clients all material facts about their relationship and any recommendations being made. These disclosures must include the broker capacity, fees, the type and scope of services provided, any conflicts, any limitations on services and products, and whether the broker-dealer or investment adviser will provide monitoring services. The Securities and Exchange Commission (SEC) requires that all costs an investor pays in fees and expenses must be disclosed because, for each of those dollars spent on costs and fees, is a dollar that is not invested.
Reg BI and industry rules also impose a duty of care requiring broker-dealers to exercise reasonable diligence, care, and skill when making recommendations to their retail customers. Broker-dealers must also ensure that they have a thorough understanding of the potential risks, rewards, and costs associated with any recommendation they make. Once this due diligence is complete, the broker-dealer must compare those facts to their retail customer’s investment profile and make recommendations that are in the best interest of the customer.
The duty of care required under Reg BI includes the duty to only provide advice in the best interest of clients, seek only the best execution of a client’s transactions with the adviser having the responsibility to select broker-dealers to execute client trades; and provide advice and monitoring throughout the relationship. Under Reg BI, broker-dealers are also required to establish written policies designed to disclose and potentially eliminate any potential conflicts of interest.
One of the most important parts of Reg BI is the requirement to deliver a client relationship summary (CRS) to retail investors at the beginning of their relationship. In the CRS, firms are required to summarize information about their services, fees and costs, conflicts of interest, legal standard of conduct, and the firm and its financial professionals disciplinary histories (if any).
The format of the CRS must contain a standardized question-and-answer format to promote comparison by retail investors in a way that is distinct from other existing disclosures. It should highlight the Securities and Exchange Commission’s (SEC) investor education website, investor.gov, that provides educational information to the investing public, including educational videos that provide the ordinary investor basic information about broker-dealers and investment advisers. There are specific requirements for creating and maintaining the CRS which we will cover in a future blog post but complete instructions can be found on the SEC website.
Reg BI will likely face future challenges, and the SEC will provide additional clarification on compliance and specific issues, however; it is important to have a solid understanding of what Reg BI means to your as a financial services professional.
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